Target of 3 million apprenticeships and new funding system risk poor value for money

31 January 2017

In April 2017, the government is introducing an ‘apprenticeship levy’ (a 0.5% tax on an employer’s paybill above £3 million per year), which is estimated to raise £2.8 billion in 2019–20. At the same time, it is introducing more generous subsidies for employers training apprentices in England. However, government spending on apprenticeships in England is only expected to increase by £640 million between 2016–17 and 2019–20. So most of the revenue raised is being spent elsewhere.

This new funding system is intended to help the government meet its commitment that there will be 3 million apprenticeships starting in England between 2015 and 2020. However, the significant expansion and design of the new system risks it being poor value for money. Specific elements of the system could end up being particularly damaging to the public sector.

It is already the case that 44% of new apprentices are aged 25 and over and the new target is likely to increase this fraction. There is a risk that the apprentice ‘brand’ is becoming just another term for training.

These are among the conclusions from new analysis of reforms to apprenticeship funding by IFS researchers, which forms part of the forthcoming IFS Green Budget 2017, produced in association with ICAEW and funded by the Nuffield Foundation. The analysis examines the new system for funding apprenticeships and its potential effects. It finds that:

Although the apprenticeship levy increases taxes on large employers, the new subsidies for employers to train apprentices mean that employers will have to pay nothing, or at most 10%, of off-the-job training costs for apprentices, up to certain price caps set by the government. This will increase the incentive to employers to hire apprentices, particularly those aged 19 and over for whom employers paid at least 50% of training costs prior to 2017.

This zero or near zero cost of training poses considerable risks to the efficient use of public money. Employers will have little incentive to choose training providers who can provide training at a lower price. Employers will also have a big incentive to re-label existing training schemes as apprenticeships.

The target of an average of 600,000 new apprentices a year in this parliament is a 20% increase on the level in 2014–15. This large expansion risks increasing quantity at the expense of quality. Although the government is trying to increase the quality of apprenticeships, the Institute for Apprenticeships may come under pressure to approve new apprenticeships quickly. Ofsted will take on an expanded (and welcome) role with respect to inspecting training providers and employers. However, it has already expressed serious concerns about the quality of apprenticeship schemes, particularly those created more recently.

The apprenticeship levy will put downward pressure on wages. The Office for Budget Responsibility assesses that it will reduce wages by about 0.3% by 2020–21. While only 2% of employers will pay the levy, at least 60% of employees work for employers who will pay the levy.

The government has set every public sector employer with at least 250 employees in England a target that 2.3% of their workforce must start an apprenticeship each year. This takes no account of big differences between organisations. Unless existing employees start apprenticeships, the targets imply around one-in-five new public sector hires must be an apprentice. Such a blanket policy cannot be an efficient way to improve skills in the public sector. It risks costly reorganisation of training and inefficient ways of working. These targets should be removed.

The government has also failed to make a convincing case for such a large and rapid expansion in apprenticeships. In seeking to justify these changes, it quotes statistics that show a collapse in employees’ training. However, better measures of training show a much more modest decline. The government also makes wildly optimistic claims about the extra economic activity or earnings such investment in apprenticeships could generate (with quoted benefit-to-cost ratios of over 20:1). While there is a clear need for a better-trained workforce, this cavalier use of statistics risks undermining what might be a perfectly sensible case for a gradual expansion of apprenticeships in areas where quality can be assured.

Neil Amin-Smith, an author of the report, said: “We desperately need an effective system for supporting training of young people in the UK. But the new apprenticeship levy, and associated targets, risk repeating the mistakes of recent decades by encouraging employers and training providers to relabel current activity and seek subsidy rather than seek the best training. There is a risk that the focus on targets will distort policy and lead to the inefficient use of public money.”

Jonathan Cribb, another author of the report, said: “With the subsidies for apprentices’ training costs at 90% or 100%, employers are encouraged to take on more apprentices. But this also provides them with little or no incentive to choose a training provider with a lower price. In addition, the specific targets for most public sector employers in England to employ apprentices could lead to costly, and potentially damaging, re-organisations, and should be dropped.”

The full Green Budget publication, with analysis from IFS, ICAEW and Oxford Economics and funded by the Nuffield Foundation, will be launched at 10:00 on Tuesday 7th February 2017 at Guildhall London and will be published in full on the IFS website then.